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Written by Dr. Kara Tan Bhala on Monday October 4, 2021
In the first instalment of her ethics masterclass, Dr. Kara Tan Bhala shares her experience as a rookie sell side analyst.
So many of the challenges facing our financial sector – from mis-selling, to insider trading, to anti-competitive practices, bullying, discrimination and more – find their root in a failure to apply ethics. To overcome these, we have to put ethics back into the theory and practice of finance, rethink the purpose of our organisations, and equip individuals with the evaluative and analytical tools that they need in order to navigate the complex ethical situations that arise within any career in the financial sector.
In this four-part series, I will guide you each week through a case study taken from my book, Ethics in Finance: Case Studies of a Woman’s Life on Wall Street. The book draws on the experiences I’ve gathered during a 30-year international career in finance to provide a lucid, comprehensible guide to financial ethics for young people, in the hope that they may build a more ethical and socially responsible financial industry.
In this week’s instalment, we’ll set the scene and some of the characters: a Malaysian plantation adventure for a rookie sell side equity research analyst. It was my first job in finance and the first of many ethical dilemmas I would encounter during my career. This week we’ll learn more about the currently much-maligned oil palm industry, before moving on next week to discuss the inner workings of securities analysis, and the personal and professional conflicts that can confront unwary young people entering this field (which a typical business school education may leave them unprepared for).
In the concluding weeks, I will highlight the prominent ethics issue in the case, before describing the tools that you can use to analyse this (and similar) issue(s), finally wrapping up with some suggestions on how to resolve such problems and the best action to take.
I hope you’ll take away not only some pointers that you can apply to your own working life but, moreover, some tools that can be shared with colleagues across your organisation, whether through your training programmes, induction procedures, or within any longer-term programme of cultural transformation.
The segment of the financial industry that analyses, promotes, and sells securities is called the sell side. This side of the business generates and sells its products to the buy side of the business. Investment banks and stockbrokers are sell side players and therefore, investment bankers, stockbrokers and those who engage in securities analysis for these institutions are sell side professionals.
My first job in finance was as a sell side equity analyst based in Singapore, researching stocks in the Malaysian and Singaporean stock markets. The firm that hired me, to my surprise, was a blue-chip British stockbroker. The salary was beyond my expectations and the work even seemed quasi-intellectual. I was ecstatic. Guanyin, the Bodhisattva of Mercy and Compassion, had answered my prayers. The company, as with most independent brokers after the Big Bang in the UK (when financial markets were deregulated) was eventually taken over by a global bank. As a rookie analyst, my boss gave me the responsibility of covering the plantation and conglomerate sectors of these markets. My job was to do in-depth fundamental equity research on listed companies in these sectors and make objective stock recommendations to our clients.
The plantation sector is distinctive to Malaysia. The country’s exports currently comprise about 8% of soft commodities, palm oil, and rubber, but in the late 1980s, the percentage was closer to 18%. At that time, the plantation sector was an important one for the Malaysian stock market. Six large plantation companies made up a significant combined market capitalisation. The historical importance of this sector is grounded on the country’s economic development.
The Malaysian plantation industry started with British and other European colonisers planting cash crops such as oil palms and rubber. Henry Ridley, the Director of the Singapore Botanic Gardens, encouraged the large-scale planting of rubber trees (Hevea brasiliensis) in Malaysia in the late nineteenth century. He had the vision that rubber would become important in the world economy with the advent of the motor car requiring rubber tyres. In addition to encouraging rubber planting, Ridley was also responsible for developing the first systems of tapping the bark of the rubber trees in a way that maximised latex yield and minimised the consumption of bark. British-owned estates grew a vast majority of the rubber. In the 1960s there was a shift within the plantation industry from rubber to oil palms.
The oil palm, Elaeis guineensis, is a palm native to the tropical coastal areas of West Africa. The first Malaysian commercial planting of 80 hectares took place in 1917 under the supervision of Henri Fauconnier, a Frenchman who established extensive rubber estates in northern Selangor before the First World War. Fauconnier planted his oil palms on Tennamaram Estate, north of Kuala Lumpur, the capital. Oil extracted from the oil palm fruit is called palm oil. Oil from the kernel or seed of the oil palm is called palm kernel oil. Palm oil is an extremely versatile vegetable oil and is used in a multiplicity of products from doughnuts to lipstick. In recent years, oil palm has come under critical scrutiny because its cultivation is associated with deforestation, climate change, and the destruction of wildlife species such as the orangutan. Health concerns have also been raised around its use in food products.
Malaysia in the 1990s was an emerging market and economy. Most Malaysian plantations are run in the style of large agribusinesses but there are a handful of plantations run by owners descended from a line that began with the original colonial planter who started the business.
In the first year of my sell side and financial life, a rather venerable plantation company decided to do a secondary share offering. My company was chosen as the broker for the offering and I was to write a research note on our client’s plantation business. I was to evaluate the company and make a recommendation to investors.
Those in finance and law will understand when I say that a “Chinese Wall” is meant to separate sell side equity research and trading and sales in the same investment bank. The research generated by analysts such as myself ought to be objective and free from any influence from the sales and trading desks of the same company. Indeed, the latter is not to even speak to analysts about the company in the period prior to and during a share offer.
While I was aware of this particular conflict of interest, I had a rather vague notion of another source of conflict, which is the one between the needs of the company being analysed and doing what is best for the clients of the research analyst. The client wants honest, dependable research while the offering company would like the most favourable review. Unsurprisingly, the two goals sometimes conflict.
One interminably marketed pitch of sell side research is the unique benefits of analyst visits to the company to ‘kick the tyres’ and get straight talk from management. I was young, energised and eager to do insightful work. I packed my bags, readied myself for a tour of the plantation and an overnight stay at the home of the company’s CEO – call him Paul – at his invitation…
In the next instalment we will discuss what awaited me at the plantation: my experiences, feelings, thoughts, and the decisions I had to make. Until then, some questions to consider:
Please submit your own questions and thoughts in the comments section below or email them to: QuestionsforKara@int-comp.org. This series will conclude with a Q&A session in which Dr. Bhala will be delighted to answer these and any other questions you might have.
Dr. Kara Tan Bhala is the President and Founder of Seven Pillars Institute for Global Finance and Ethics, USA, the world’s only independent think tank for research, education, and promotion of financial ethics. The Institute’s quest is to put ethics back into the theory and practice of finance. Kara’s latest book, Ethics in Finance: Case Studies from a Woman’s Life on Wall Street, gives a refreshing and instructive view of the world of global finance. The book recounts entertaining stories of an immigrant Asian American woman’s journey through the top echelons of Wall Street, with enduring lessons about ethics from her 30 years of experience. Kara has been a sell-side equity analyst, a sell-side equity salesperson, a buy-side equity analyst, a portfolio manager, and a lecturer in finance. She is an Honorary Research Fellow at Queen Mary University of London, UK. Kara therefore, has a rare combination of professional training and extensive experience in both global finance and moral philosophy. She has five degrees across three disciplines: a Bachelors (City, University of London, UK) and Masters (Oxford University, UK) in Business, a Masters in Liberal Studies (New York University, USA), and a Masters and PhD in Philosophy (University of Kansas, USA). Kara has lived and worked in London, Oxford, Singapore, Hong Kong, New York, and Washington DC. She is a member of the Council on Foreign Relations, USA, and the Royal Society of Asian Affairs, UK.
In this four-part series, Dr. Kara Tan Bhala will guide you each week through a case study taken from her book, Ethics in Finance: Case Studies of a Woman’s Life on Wall Street.
She will recount her experience as a rookie sell side equity research analyst researching stocks in the Malaysian and Singaporean stock markets, and she will describe the ethical challenges that she encountered when called upon to produce a research note on a high-profile client’s plantation business.
As well as identifying and examining the key interpersonal and ethical challenges that emerge in such situations, she will also introduce ethical frameworks and practical evaluative tools that can be used to solve these, and similar, problems.
The series will conclude with a Q&A session that viewers can watch online and on demand. You are invited to submit your questions and share your experiences.
Part 1 of Dr. Kara's ethics series has been made especially available to everyone in the ICA community and the wider compliance industry. To access the remainder of the series, learn how to become an ICA member.
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